Tuesday, March 16, 2010

An Odd Way to Measure the Success of Mortgage Mods

The Obama administration has an odd way of assessing the results of its $50 billion Home Affordable Modification Program, or HAMP.

When the program was announced a year ago, the administration said it would “offer reduced monthly payments for up to three million to four million at-risk homeowners,” people in danger of losing their homes to foreclosure. That phrase, though qualified by the words “up to,” set high expectations.

Given the complexities of the program and the bureaucratic inertia of the big banks that are struggling to carry it out, it isn’t very surprising that the results so far have failed to meet those expectations. As of Feb. 28, 168,703 households had “permanent” loan modifications under the program, while 835,194 were in the trial stage. Borrowers accepted for the program are expected to make three monthly payments before their modifications can be deemed permanent, though in many cases it’s taking far longer for the banks to decide whether to proceed with a long-term mod.

Many of the people in trial mods will crash out of the program. Some are unable or unwilling to document their financial situations; others turn out not to qualify once banks take a closer look at their finances. Some fail to keep making the reduced payments. Wells Fargo & Co. said last week that, among the 108,000 borrowers who had completed three trial HAMP payments to Wells as of Feb. 28, only about half were expected to qualify for permanent mods.

Even so, the administration argues that HAMP is going well because more than 1.3 million homeowners have received offers of trial modifications. That’s closing in on half way to three million, the lower end of the original goal, and the administration has given itself until 2012 to hit that target.

Yet getting an offer of help doesn’t translate into home-saving success in a huge number of cases, though it does delay the foreclosure process considerably.

Asked about whether it makes sense to measure the program in terms of trial offers made rather than durable modifications achieved, a Treasury spokeswoman said: “The three million to four million as a goal by 2012 has always been for offers extended to borrowers.”

One reason so many trial-mod offers have been made is that the Treasury, in a rush to show results, last year made the mistake of encouraging banks to offer trials before completing the paperwork to make sure borrowers really qualified. The Treasury has since changed its policy and now will require the banks to verify the financial information before starting the trials. But the initial policy already has puffed up the number of people in trials and so helps the Treasury argue that the program is working.

Even for those who do get “permanent” mods, many eventually will default because they are still drowning in debt. HAMP is designed to shrink payments for the mortgage, property taxes, insurance and homeowners association or condominium fees to 31% of pretax income. But many of the eligible households have huge wads of credit card and other debts. Even after loan modifications, the median ratio of monthly debt payments to pretax income is 60%, the Treasury says.

Despite the huge expectations the administration built up for HAMP, dealing with this situation was never going to be easy. Nearly eight million U.S. households, or 15% of those with mortgages, are behind on payments or in foreclosure in what has become by far the worst wave of defaults since the 1930s. Stand by for more rescue plans from Uncle Sam, and perhaps more inflated expectations.